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UK CPI Rises More Than Forecast; Pressure Mounts on Bank of England to Act

UK CPI Rises More Than Forecast; Pressure Mounts on Bank of England to Act

2011-03-22 10:08:00
Jonathan Granby,
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UK inflation continued to rise in February, at a faster pace than forecasts had expected adding pressure on the Bank of England to raise its benchmark interest rate away from 0.50%. Consumer prices rose 0.7% month-on-month, faster than the 0.6% forecast and climbed 4.4% year-on-year faster than expectations of 4.2%. The 4.4% reading was the highest since October 2008 and is more than double the central bank’s 2% target.

Important to note was the core CPI reading which also rose above expectations to 3.4% (vs. 3% forecast) indicating that inflation is not simply oil/commodity-induced price pressure. The breakdown shows that housing and clothing fueled a large part of the jump in consumer prices, indicating that inflation may be taking deeper root than commodity related fluctuations. The most recent round of inflation data will certainly give Bank of England/MPC rate hawks more ammunition to argue their case for immediate action. Meanwhile, the RPI also accelerated in February to 5.5% from 5.1% in the previous month, the fastest since July 1991.

As if this news was not bad enough the UK public finance data which was also was released came out much worse than anticipated and will hardly help UK Chancellor Osborne who delivers his “Budget for Growth” later. The budget deficit unexpectedly widened as government revenue fell.

UK_CPI_body_gbp.png, UK CPI Rises More Than Forecast; Pressure Mounts on Bank of England to Act

Chart created using Bloomberg

The pound was immediately stronger against the dollar extending its early Europe session gains to fresh highs. Gbp/Usd has been in an intense uptrend in recent days as bulls once again try to push the pair to establish itself back above 1.63 after failing to do so in recent attempts. We can see how intense the up-move has been by the distance from the 10-day SMA, some 200-points away, which could suggest that we are nearing the end of this uptrend before some consolidation and a pull-back. Any dip lower, however, should be well supported on the back of the latest release as the market anticipates that rising inflationary pressure will force the Bank of England to raise rates. To the upside 1.64 presents the next upside target.

Written by Jonathan Granby, DailyFX Research Team

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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